Joan Muller

Offers euro-based income stream

Potential for retail development is huge

“Romania offers the same level of development potential that SA had 20 years ago. Its population of 22m makes it the seventh-largest country in the EU”

— JEFF ZIDEL

SA-listed property players continue to bulk up their offshore portfolios, with the bigger funds keen to cash in on the recovery in global real estate markets. But not everyone is following the conventional route.

Unlike Growthpoint Properties and Redefine Properties, who have over the past two years assembled sizeable real estate portfolios in Australia, the UK and Germany, the Resilient group has chosen Romania for its offshore expansion trail.

The group’s Romanian interests were listed through New Europe Property Investments (Nepi) on London’s AIM in August 2007 and on the JSE in April 2009. A listing on the Bucharest stock exchange will follow next month.

Resilient’s move into the former communist country may have come as a surprise to many. But the group, which was founded by industry heavyweights Des de Beer, Jeff Zidel and Barry Stuhler in the early 2000s, has never been known to follow the crowd.

While most industry players were building glitzy malls in the big cities, Resilient developed large shopping centres in the less glamorous but underserviced platteland towns of Tzaneen, Brits, Rustenburg, Nelspruit and the like.

The focus on nonmetropolitan retail has helped Resilient consistently outperform the listed property sector over the past five years.

Assets under management have grown from less than R500m in 2002 to about R30bn today, including JSE-listed Capital Property Fund, Fortress Income Fund and exchange-traded fund PropTrax

And management believes Romania is the one country where they can successfully duplicate their SA investment model.

“Romania offers the same level of development potential that SA had 20 years ago. Its population of 22m makes it the seventh-largest country in the EU, yet it’s one of the least developed in terms of real estate infrastructure,’’ says Zidel, a nonexecutive director of Nepi.

Romania enjoyed one of the highest economic growth rates in Europe during the 2000s. The economy had to be built virtually from scratch after the rule of feared dictator Nicolae Ceausescu came to an end in 1989.

Other offshore investors have entered Romania’s commercial real estate market in recent years, but most of them were overgeared, which left them badly burnt on the back of the credit crunch and the recession.

Nepi CEO Martin Slabbert says that’s left a gap for experienced players with strong balance sheets to buy existing and half-completed retail, office and industrial buildings at discounted prices. Entry yields of about 8%-12% compare favourably with yields of 5%-7% in most other European countries.

Over the past four years, Nepi has built up a Romanian portfolio of 27 retail shopping centres, office blocks and industrial buildings worth around R3bn.

The portfolio is poised for significant further growth over the next 12-18 months.

Slabbert, who relocated from SA to Romania in 2005, believes the retail sector is where the best investment returns will be.

Nepi’s portfolio has a 50% exposure to retail, comprising four shopping centres in the cities of Ploiesti, Braila, Brasov and Pitesti.

They all offer extensive redevelopment opportunities. More retail acquisitions are in the pipeline.

“The aim,” says Slabbert, “is for Nepi’s centres to dominate their respective catchment areas to such an extent that they shut out any potential competition.’’

Slabbert believes Romanian consumers will increase their appetite for retail therapy in leaps and bounds over the next few years, with low household indebtedness and an unemployment rate of below 7% making Romania one of Europe’s top future retail hotspots. In fact, research group Oxford Economics expects the growth of Romania’s retail sales market to be Europe’s third-fastest over the next decade (see table).

A key question for SA investors looking to diversify their property interests offshore is what makes Nepi a better bet than other JSE-listed offshore property counters such as Redefine International

The latter owns a portfolio of directly held and listed properties in Germany, the UK and Australia, and is probably the closest alternative to Nepi.

Macquarie First South Securities property analyst Leon Allison says Nepi is a much simpler and more focused property company than Redefine International.

“Gearing is lower and the income stream more predictable.

“In addition, Nepi pays out an aftertax dividend while Redefine International’s income distribution is taxable in the hands of investors.’’

Allison says Nepi’s historical aftertax yield of 5,2% is equivalent to about an 8% pretax yield, which is attractive in global terms.

In addition, income growth of around 10%/year is expected over the next three to five years.

“Nepi provides both a high yield and high capital growth potential, driven by debt funding rates of about 6,5% and initial yields on acquisitions and brownfield developments of 8%-12%.’’

Brendon Hubbard, fund manager at ClucasGray Investment Management, says it’s comforting that the Resilient management team has a proven track record as far as unlocking value for shareholders is concerned.

“We also like it that Nepi is internally managed and that directors have a 20% stake in the company.

“That means management’s interests are aligned with those of shareholders.’’

But as with any other offshore investment there is risk in currency movements. Ian Anderson, chief investment officer at Grindrod Bank, says income-dependent investors need to understand that an offshore property investment like Nepi offers less certainty of income than SA-based property stocks.

“That’s because currency movements cannot be predicted accurately. For instance, you may get 15% growth in your euro income, but if the rand strengthens by 20% in that particular year your income payouts will drop.’’

However, Anderson concedes the flip side is that income payouts will be boosted on the back of rand weakness.

Muller was a guest of Nepi in Romania

Source: Financial Mail